Recently, many beginners have been asking about leveraged trading, so I’ll give a simple explanation of how this thing actually works.

Imagine Bitcoin is $50k each, and you have $50k to buy one—that’s a normal trade. But leveraged trading is different; you only need $5,000, and I’ll cover the remaining $45,000—that’s ten times leverage. Of course, the money I put in isn’t free; I’m lending it to you, and you have to pay it back later.

If Bitcoin rises to $55k, a 10% increase, you sell and pay me back $45,000, leaving you with a net profit of $10k. That’s like your $5,000 principal doubling directly. Sounds good, right? But what if Bitcoin falls?

If it drops to $45,000, your $5,000 principal is gone. At this point, you want to hold on, believing the price will bounce back, but I won’t gamble with you. Why should my money stay with you? So I have the right to sell your coins directly and take my $45,000. If the price drops slowly and hits $44,000, not only do you lose everything, but you also owe me $1,000. This $1,000 is a debt that must be repaid—that’s what we call a liquidation.

The only way to avoid liquidation is to add more funds. By topping up with another $5,000, your total capital plus the Bitcoin value will again exceed $45,000, and I’ll be at ease.

Let me tell you a story—not about Bitcoin. In China, there used to be many fake commodity exchanges. Unlike scams that just fake data, these exchanges’ data were all real, but they still managed to wipe out investors’ funds.

For example, a product with ten times leverage—say, trading a certain commodity—where the current price is $50k per unit. Many traders hold both long and short positions at this price simultaneously. The exchange knows each investor’s positions, their account funds, and actual leverage ratios—that’s crucial.

One dark, windy night, the exchange teams up with a few powerful market makers, ready with large capital, and can wipe out everyone in one go. Why at midnight? Because most investors are asleep and can’t top up their positions in time.

During the night, several market makers aggressively buy long, pushing the price up to $55,000. Traders with full positions and no cash on hand, using ten times leverage, get liquidated immediately. But they’re still sleeping and can’t add to their positions, so the “leeks” (retail traders) get forcibly liquidated. This operation doesn’t require much money because most people are asleep; a small amount of capital can push the price higher. The subsequent forced liquidations of shorts automatically create new buy orders, invisibly helping the market makers continue to push the price up.

As the price keeps rising, more traders get liquidated. Investors with nine times or eight times leverage also start getting wiped out. Eventually, the market makers use very little capital to snowball and liquidate various leveraged short positions.

Suppose the price rises from $50k to $75k; all shorts with more than five times leverage get liquidated. Where does that money go? Assuming the market makers also use ten times leverage, closing a position from $50k to $75k yields a pure profit of four times the initial capital.

Even more impressive, after pushing down the shorts, the market makers can turn around and push up the longs. They aggressively short to depress the price. Since the $50k to $75k rise was driven mainly by the market makers themselves, there aren’t many follow-up traders. Pushing the price back down from $75k to $50k is easy, and by increasing their capital again and reversing the operation, they can push the price down further to $25k. This time, all the longs with more than five times leverage get liquidated again, and the market makers buy in at the bottom.

All these trades are real; it’s just that the market makers have much larger funds than retail traders and control detailed trading data—knowing who opened positions at what prices, how big their positions are, what leverage they used, and even when retail traders are inactive. With this inside information, they can execute precise strikes. Retail traders get liquidated long or short, while the market makers profit immensely.

This story isn’t about Bitcoin; it’s about unregulated, unscrupulous exchanges in the black market. Of course, legitimate markets don’t operate this way. But if you want to survive leveraged trading, the most important thing is to understand the liquidation mechanism and be aware of the risks. Never believe you can predict the market perfectly, and never use leverage beyond your capacity to handle. The market is always more brutal than you imagine.